Administration for not-for-profit organisations

Group of people working on humanitarian aid project

When it comes to funding charities and not-for-profit organisations (NFPs), funders have overlooked something for many decades – the overheads and indirect costs.

It costs money to run a charity!

Many NFPs rely on the goodwill and donated time of volunteers, but overheads and indirect costs remain an unavoidable part of the equation.

According to Paying What it Takes, a report by The Centre of Social Impact and Philanthropy Australia, most funders in Australia do not provide money for not-for-profits’ indirect costs or overheads – leading to lower capability and effectiveness across the sector.

The report defines indirect costs as the “costs incurred by an organisation that cannot be directly and easily attributed to a specific project.”

This means if the project did not exist, the organisation would likely still need to incur this cost.

Indirect costs include IT, finance, human resources, learning and development, measurement and evaluation, governance, planning and compliance.

The report makes interesting reading, and it shows the average indirect costs of the NFPs analysed were 33% of total costs, with significant variations of between 26% and 47%.

That’s leaving some NFPs with almost half of their outgoings unfunded.

NFPs work hard to keep spending costs to a minimum and are mindful to direct as much of their money raised as possible towards their goals.

But every organisation still requires the internal infrastructure necessary to ensure that they are well managed, well-governed and achieving compliance measures so they can continue to run the organisation’s programs and deliver on its purpose.

coins and silver calculator with text on display-funding

Better funding for NFPs

Paying What it Takes uncovered data that shows securing funding for indirect costs and overheads is a key problem for NFPs in Australia, with suggested actions to address this problem including:

1. Funders, both philanthropic and government, should focus on impact when assessing NFPs.

2. Low indirect costs do not mean that a not-for-profit is impactful, and high indirect costs do not imply that it is not impactful.

3. Effective not-for-profits incur indirect costs that need to be funded to enable them to achieve their impact. Funders can increase their impact by offering full-cost funding.

4. Understanding impact requires investment in measurement systems.

A significant proportion of NFPs stated they under-reported their indirect costs to funders due to a pervasive belief that funders are unwilling to fund more than 20% of indirect costs.

Red heart symbol is put by person's hand into slot of white donation box

The costs of running a charity

Just like any other business, charities and NFPs have outgoings to monitor and manage.

They are crucial things like:

  • Utilities, premises and equipment costs
  • Information and communications technology
  • The cost of recruiting, training, professionally developing and supervising staff
  • Workplace health and safety requirements, and of course
  • Financial management and accounting.

Depending on the activities they are involved in, costs can also ebb and flow.

But overspending on administration is not usually an issue in most NFPs; in fact, it’s more common for organisations to spend too little in their desire to be responsible stewards of donated funds.

True Accounting CEO Kirsten Forrester is a tireless champion of quality financial management in the NFP sector and has long felt irritated by the expectation that NFPs should be able to operate on the slimmest of overhead costs.

“It simply isn’t practical and doesn’t promote good governance and a standard of management – not to mention facilities, equipment, work health and safety and training that NFP clients and employees alike should be able to expect,” Kirsten said.

An True Accounting benchmarking analysis revealed rent alone can eat up to 10% of annual revenue for the NFPs we assist.

“Almost half of the sample spends less than 1% of revenue on rent, which is not unreasonable, but it is still a necessary cost, and it is interesting to note that the range was from 0.1% through to a much more substantial 12.9%,” Kirsten said.

“Audit is another unavoidable cost and while this expense sat below 1% of annual revenue for 72% of our sampled clients, it ranged through to 8.3% at the top end of the sample.”

Balanced stone in a shore

So how do you get the balance right?

Balancing frugality with strategies to properly manage the funds entrusted to you is an important and ongoing task for NFPs.

Firstly, NFPs must ensure they have the processes in place to meet the standards of administration required, by law.

Secondly, a properly implemented finance system will provide great insight into how funds are allocated.

At True Accounting, we recommend cost centres for tracking categories in Xero and jobs in MYOB – used to capture the income and expenditure associated with an organisation’s various activities.

This is especially important when there is an obligation to acquire funding.

An accountant with NFP experience can assist you to set up the right documentation and finance procedures to assist with managing your funds.

The right level of oversight through quality reporting usually helps an NFP to identify where they can free up money too.

Analyst Working With Spreadsheet On Computer Screen

Getting professional help

To ensure your NFP balances the need to adhere to the standards, remain accountable and transparent to stakeholders and operate with good administrative management, it is likely you will need professional help.

Many NFPs aren’t at the scale to have all the necessary back-of-house specialists on staff but outsourcing these services is a sound way to ensure the proper management of their finances.

At True Accounting, we are highly-skilled specialists in not-for-profit accounting and partner with your organisation to assist with anything from basic bookkeeping to high-level chief financial officer financial management.

Our team is here to help your organisation to manage the administrative side of things, so your staff can continue to work towards charitable operations and fulfil your overall mission.

Overheads and indirect costs are unavoidable for NFPs, but with the right help, you can ensure you are spending every dollar strategically and making sure you get the best bang for your buck.

For more information on expert accounting services for NFPs, Contact Us today.

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